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Sector: Financial Services
The Export-Import Bank of Korea
- Sector: Financial Services
- Sub Sector: Banks
- Region: Korea
- Bond: EIBKOR 5.125 33
- Indicative Yield-to-Maturity (YTM): 4.55%
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Fundamental View
AS OF 14 Aug 2024- KEXIM is a pure policy bank that is directly and indirectly wholly owned by the government of the Republic of Korea, which is obliged under Article 37 of the Export-Import Bank of Korea Act to fund any losses that cannot be covered by the bank’s reserves.
- While this is a solvency guarantee and does not explicitly guarantee the timely repayment of debt, we view it as inconceivable that the Korean authorities would fail to provide KEXIM with support in a timely manner, should this be needed, given its crucial policy role and close government links.
Business Description
AS OF 14 Aug 2024- KEXIM was set up in 1976 to support Korean companies in their overseas business through export credit guarantee programs, as well as providing finance for imports and for overseas investment. It provides funding for both short term trade and long term investment, and manages two government-entrusted funds: the Economic Development Cooperation Fund (EDCF), a Korean official development assistance program, and the Inter-Korean Cooperation Fund (IKCF), an economic cooperation program to promote exchanges with North Korea. It is also a conduit through which the government doled out COVID-19 assistance to affected companies.
- Till 2030, KEXIM aims to preferentially focus on seven sectors (hydrogen energy, wind and solar power, rechargeable battery and energy storage systems (ESS), future mobility, 5G and next-generation semiconductors, pharmaceutical and healthcare, and digital technology and cultural content) which are considered new growth drivers of the Korean economy. It has historically focused on the shipbuilding and engineering & construction industries.
- KEXIM is 100% owned by the Korean government: 73% directly and the remainder through stakes held by the Bank of Korea (8%) and Korea Development Bank (19%). In contrast to peer policy banks IBK and KDB, KEXIM has remained more consistently a policy bank but its role has been adjusted to ensure it complements rather than competes with the Korean commercial banks.
Risk & Catalysts
AS OF 14 Aug 2024- Previous Korean governments have made moves to privatise the other policy banks, but KEXIM has retained its policy bank role and government ownership, which are not likely to change.
- Korea’s shipbuilders have long been the largest users of KEXIM’s services. Losses on exposure to the sector, in particular Daewoo Shipbuilding (DSME), pushed KEXIM into the red in 2016 but the government injected capital and its condition has recovered.
- Together with KDB, KEXIM has played a key role in helping corporate Korea survive the COVID-19 induced crisis.
- KEXIM’s ratings are the same as the Korea’s sovereign ratings, which are now all in the AA range.
Key Metric
AS OF 14 Aug 2024| KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Pre-Impairment Operating Profit / Average Assets | 1.3% | 1.2% | 1.1% | 1.1% | 1.1% |
| ROAA | 0.5% | 0.1% | 0.5% | 0.4% | 0.6% |
| ROAE | 3.2% | 0.7% | 3.2% | 2.7% | 4.7% |
| Provisions/Average Loans | 0.5% | 1.2% | 0.5% | 0.8% | 0.3% |
| Nonperforming Loans/Total Loans | 2.4% | 1.8% | 1.9% | 1.2% | 0.7% |
| CET1 Ratio | 12.9% | 13.4% | 13.3% | 11.8% | 13.0% |
| Total Equity/Total Assets | 14.9% | 14.8% | 15.1% | 12.6% | 14.3% |
| Net Interest Margin (NIR/Ave Assets) | 1.0% | 0.9% | 0.9% | 0.9% | 0.7% |
CreditSight View Comment
AS OF 09 Oct 2024KEXIM is a wholly government owned policy bank benefiting from a Korean government solvency guarantee. It plays a key role in financing large-ticket exports in particular ships and large-scale overseas engineering projects. Its credit exposures include some industry and borrower concentrations especially to Korea’s shipbuilders and its financial performance has at times suffered. But the Korean government has always acted in a timely manner to endure its solvency, and with this strong backing we view it as a sound credit. We view its secondary levels as in line with where we would expect it to trade, and so continue with our Market perform recommendation.
Recommendation Reviewed: October 09, 2024
Recommendation Changed: September 22, 2020
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Fundamental View
AS OF 07 Mar 2024Mizuho (A1/A-/A-) undertook large restructuring charges in FY18 to improve its weak returns. Its performance improved in FY20 and FY21, though a series of Japan IT system failures was a distraction. FY22 was a mixed year due to challenging revenue growth, but 3Q23 has been better.
Mizuho’s CET1 ratio buffer has improved but is somewhat low at 1.6%, but is acceptable given comfortable asset quality metrics.
As one of the three megabanks, Mizuho’s credit standing benefits from a strong expectation of government support, if needed.
Business Description
AS OF 07 Mar 2024- Mizuho is just about the third largest by asset size among Japan's three megabanks. It was formed in 2000 through the merger of the former "City" banks, Fuji and Dai-Ichi Kangyo, and the Industrial Bank of Japan, a provider of long-term industrial credit financed by bond issues.
- Its main units are Mizuho Bank and Mizuho Trust & Banking (focusing on asset management and related services). The group's other main business is Mizuho Securities, a leading player in debt capital markets in Japan and the US.
- It expanded in North America in 2015 by acquiring assets and staff from RBS and has successfully captured more markets and commercial banking business in conjunction with its securities arm. It also acquired Greenhill, a boutique M&A firm, in 2023.
- Mizuho is less diversified than its peers by product segment and has historically been more corporate focused.
Risk & Catalysts
AS OF 07 Mar 2024Asset quality has been benign and not much affected by COVID-19 up to and throughout FY21; credit costs in FY22 decreased to a low 8 bp of loans and down to a further 1 bp in 9M23.
The CET1 ratio (fully Basel III compliant and ex-security gains) is 1.6% above the 8% regulatory minimum, which is fairly low level but acceptable for now given benign asset quality.
FY22 was a mixed year for Mizuho as the bottomline was propped up by reduced credit costs, while revenue growth continued to be anemic as was the case over the previous few years. 9M23 has been helped by a large trading beat.
Mizuho has correctly started to make investments in building its capabilities (Greenhill/Rakuten), which it had shied away from for a 7-8yr period due to low capital levels and a focus on reducing expenses.
Key Metric
AS OF 07 Mar 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Ave Assets | 0.36% | 0.42% | 0.44% | 0.41% | 0.35% |
| Operating Income/Average Assets | 1.02% | 1.03% | 1.01% | 0.96% | 1.05% |
| Operating Expense/Operating Income | 67% | 64% | 62% | 63% | 59% |
| Pre-Impairment Operating Profit / Average Assets | 0.33% | 0.37% | 0.38% | 0.34% | 0.43% |
| Loan impairment (charge) or reversal/ave. loans | (0.21%) | (0.25%) | (0.28%) | (0.10%) | (0.02%) |
| ROAA | 0.22% | 0.22% | 0.24% | 0.23% | 0.34% |
| ROAE | 5.2% | 5.3% | 5.8% | 6.1% | 9.0% |
| CET1 Ratio excl. unrealised securities gains in AOCI | 11.0% | 10.5% | 11.5% | 11.3% | n/m |
CreditSight View Comment
AS OF 15 Nov 2024Mizuho historically trailed its peers on profitability and capital (which in turn prevented investments in new opportunities), as the merger that formed it included IBJ, a large wholesale bank with thin margins. FY20-21 saw good improvements in net interest income and mostly lower credit costs vs. peers. Credit costs related to Russia in 4Q21 + Japan corps in 1Q22 affected results but were better subsequently. Previous issues with its Japan IT system have not resurfaced recently. CET1 capital has a decent 2.5% buffer. Mizuho was the improved megabank over FY20-21 and again more recently. FY22 net income declined, but FY23 and 1H24 has seen a jump due to better trading revenues and low credit costs. It has finally restarted investments in new product/M&A. Govt. support is assured.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: December 05, 2022
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BMO Financial
Hyundai Motor
Toronto Dominion
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Search topics about wealth insights and investments.Mitsubishi UFJ Financial Group
- Sector: Financial Services
- Sub Sector: Banks
- Region: Japan
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Fundamental View
AS OF 07 Mar 2024MUFG is the largest of Japan’s three megabanks, and has the most diversified operations by business line and geography. It has also been the most acquisitive until recently.
Core profitability had been weak due to Japan’s ultra-low interest rates and growth; that improved post an efficiency drive and a CEO change in April 2020. The bank has committed to at least JPY 1 tn in annual net income going forward, which we see as achievable.
Given its size and systemic importance, MUFG is considered too big to fail, and will be supported by the Japanese government if needed.
Business Description
AS OF 07 Mar 2024- The 2 main banks of MUFG are MUFG Bank (earlier the Bank of Tokyo-Mitsubishi UFJ or BTMU) & Mitsubishi UFJ Trust & Banking. In the early stages of Japan's long banking crisis, Bank of Tokyo merged with Mitsubishi Bank, and in the late stages they absorbed UFJ (former Sanwa Bank & Tokai Bank) while Mitsubishi Trust absorbed Toyo Trust & Nippon Trust.
- The group includes consumer lenders Mitsubishi-UFJ NICOS & ACOM, and securities/IB joint ventures with Morgan Stanley. MUFG invested in Morgan Stanley in 2008 and now has a ~20% stake. In Dec-22, it completed the sale of its US retail and commercial bank, MUFG Union Bank, to US Bancorp.
- It has a majority stake in Thailand's Bank of Ayudhya (now Krungsri), 20% stakes in Vietnam's Vietinbank and Philippines' Security Bank, and has acquired control of Indonesia's Bank Danamon.
- In August 2019, it acquired Colonial First State from Commonwealth Bank of Australia to strengthen its global asset management business, in 2020 it invested $700 mn in SE Asia's Grab, and more recently has bought Home Credit's Philippine and Indonesian subsidiaries, Link, an Australian pension fund administrator, auto loan companies in Indonesia, Albacore Capital, an alternates fund manager, and StanChart's Indonesian retail operations.
Risk & Catalysts
AS OF 07 Mar 2024The group’s cost-income ratio was previously in the high 60’s, but improved efficiency, the sale of MUFG Union Bank (MUB) in the US, and better revenues has led to this ratio falling to the high 50’s.
MUFG is exposed to Japanese equities through large unrealised gains, but has steadily been decreasing its shareholdings every year. It reduced the MTM impact of rising yields on its $ bond portfolio, as well as the potential impact on its JGB portfolio given the modifications to yield curve controls.
MUFG had a good FY22 with impressive margin improvement, lower credit costs and the completion of the MUB sale. It has set a net income target of JPY 1.3 tn for FY23, by improving net operating profits in customer segments and expense control; it has met it in 9M23 aided by certain one-offs.
Key Metric
AS OF 07 Mar 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Average Assets | 0.60% | 0.56% | 0.57% | 0.79% | 0.63% |
| Operating Income/Average Assets | 1.27% | 1.16% | 1.11% | 1.22% | 1.27% |
| Operating Expense/Operating Income | 70% | 68% | 69% | 65% | 58% |
| Pre-Impairment Operating Profit / Average Assets | 0.38% | 0.37% | 0.34% | 0.43% | 0.50% |
| Impairment charge/Average Loans | (0.21%) | (0.48%) | (0.30%) | (0.61%) | (0.31%) |
| ROAA | 0.17% | 0.23% | 0.32% | 0.30% | 0.45% |
| ROAE | 3.3% | 4.7% | 6.7% | 6.5% | 9.6% |
| CET1 Ratio excluding unrealised securities gains in AOCI | 9.8% | 9.7% | 9.5% | 9.8% | n/m |
CreditSight View Comment
AS OF 15 Nov 2024MUFG is the largest of the megabanks with more diversified business lines. Digitalisation and operational efficiency improvements are underway and efficiency has improved over the past 3 years, particularly with the sale of Union Bank in the US. Acquisitions have become more targeted. Capital levels are adequate (and have received a bump up from the Basel 3 implementation timeline), $ liquidity is the best amongst the megabanks, and government support is assured. Lending discipline has lifted international margins, which are now well higher than the other two. Divisional performance was reasonable in FY23, strong in 1H24. Its ~20% shareholding in Morgan Stanley has been a boon. The recent jump in Americas NPLs raises questions. It trades flat to JPM, which we see as appropriate.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: January 02, 2024
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion
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Search topics about wealth insights and investments.Sumitomo Mitsui Financial Group
- Sector: Financial Services
- Sub Sector: Banks
- Region: Japan
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Fundamental View
AS OF 26 Feb 2024SMFG has had a relatively good record of managing risk and returns. It is has the highest headline CET1 ratio amongst the three megabanks, although it has been reduced by acquisitions, which have been used to bulk up its presence in aircraft leasing, capital markets, Southeast Asia, and India.
The profitability of SMFG, just about the second largest Japanese megabank, was affected by poor results from its non-SMBC subsidiaries in FY22. However, the non-SMBC subsidiaries appear to have turned a corner since 3Q22, while SMBC had a better 3Q23 after a more challenging 1H23.
Given its size and systemic importance, SMFG is considered too big to fail, and will be supported by the Japanese government if needed.
Business Description
AS OF 26 Feb 2024- The core unit of SMFG is Sumitomo-Mitsui Banking Corp (SMBC), whose main predecessors were Sumitomo Bank and Mitsui Bank.
- SMFG does not have a large trust business as Sumitomo Trust and Chuo Mitsui Trust chose not to join SMFG, but merged with each other to form the separate Sumitomo Mitsui Trust Holdings.
- SMFG's group companies include the securities firm SMBC Nikko, SMBC Trust Bank, SMBC Card Company, SMBC Consumer Finance, Sumitomo Mitsui Finance and Leasing, SMFG India Credit Company (SMICC) Sumitomo Mitsui DS Asset Management, and SMBC Aviation Capital.
- It has been acquisitive over the years, particularly in higher margin leasing assets. In 2021, the group took a 49% stake in Vietnam's FE Credit, 74.9% of Indian NBFI Fullerton Capital (now called SMICC), 4.99% of Philippines' RCBC, and 4.5% of US investment bank Jefferies. In 2022, it increased its stake in RCBC to 20%. In 2023, it acquired a 15% stake in Vietnam's VP Bank, and announced its intention to increase its stake in Jefferies from 4.5% to 15%.
Risk & Catalysts
AS OF 26 Feb 2024Asset quality has been good in recent years, but COVID-19 caused a big jump in credit costs, particularly in the leasing business and SME segment. Overall credit costs dropped in FY21 and improved in FY22 except at its consumer businesses. In 9M23 bank level credit costs are good but worse at the card and personal unsecured loans units.
SMFG has taken stakes in FE Credit (49%) and VP Bank (15%) in Vietnam, Fullerton in India (74%) and RCBC in the Philippines (20%), which we see as a sensible buildup of exposure to emerging growth areas. It supported SMBC Aviation in its acquisition of Goshawk, and is increasing its 4.5% stake in Jefferies to 15% as an expansion of its strategic alliance with the US firm for M&A/ECM/DCM opportunities. However, FE Credit is not doing well and will probably need a few years to restructure following large losses.
In FY23, international loan growth has been a struggle, and SMFG has been overtaken by MUFG on international margins.
Key Metric
AS OF 26 Feb 2024| ¥ bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| Net Interest Revenue/Average Assets | 0.65% | 0.60% | 0.64% | 0.68% | 0.68% |
| Operating Income/Average Assets | 1.37% | 1.27% | 1.23% | 1.26% | 1.38% |
| Operating Expense/Operating Income | 63% | 62% | 62% | 61% | 60% |
| Pre-Impairment Operating Profit / Average Assets | 0.54% | 0.49% | 0.48% | 0.51% | 0.61% |
| Impairment charge/Average Loans | (0.21%) | (0.43%) | (0.31%) | (0.22%) | (0.18%) |
| ROAA | 0.35% | 0.23% | 0.30% | 0.32% | 0.40% |
| ROAE | 6.5% | 4.5% | 5.9% | 6.5% | 8.0% |
| CET1 excl Unrealised Securities Gains in AOCI | 13.3% | 12.8% | 12.1% | n/m | n/m |
CreditSight View Comment
AS OF 15 Nov 2024SMFG’s banking business had performed well, while its non-bank subsidiaries had underperformed over FY21-22. The group had a better 2H vs a poor 1H23, with improved trading and fee revenues, partially offset by higher credit costs at the non-bank businesses. The group became acquisitive in 2021, taking a 49% stake in a leading Vietnamese NBFI and 15% of its parent (VP Bank), 20% of RCBC of the Philippines, 74.9% of NBFI Fullerton India (now 100%), and 4.5% in US investment bank Jefferies (increasing to 15%), so as to provide the base for the next stage of growth. Its high CET1 ratio has been whittled down by acquisitions. Its 1H24 results have been boosted by share sales and structured investment trusts.
Recommendation Reviewed: November 15, 2024
Recommendation Changed: January 02, 2024
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BMO Financial
Hyundai Motor
Toronto Dominion
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Search topics about wealth insights and investments.Australia & New Zealand Bank
- Sector: Financial Services
- Sub Sector: Banks
- Region: Australia
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Fundamental View
AS OF 22 Dec 2023- ANZ (Aa3/AA-/A+) has the leading corporate banking franchise in Australia and New Zealand, and is the largest bank in New Zealand. It has a relatively small share of the Australian domestic retail market (and so it is acquiring Suncorp). Its Asia-focused regional business suffered from weak returns post-GFC but, after restructuring, has achieved better results.
- Its core institutional business continues to do well, capital levels are comfortable, as are asset quality metrics with good collective provisioning.
Business Description
AS OF 22 Dec 2023- ANZ is a Melbourne-based bank with a history dating back to the early 19th century. Historically, its strength has been in corporate banking. It is the largest bank in New Zealand and was previously active in Asia but cut back, pulling out of India in the 1990s. It subsequently built up minority stakes in Indonesia (Panin, 39%), Malaysia (AMMB 24%) and China (Bank of Tianjin 12%), all of which it is trying to sell. After the crisis it acquired banking operations from RBS in several Asian countries including Hong Kong, Singapore, Taiwan, Philippines and Indonesia, much of which it subsequently sold to DBS.
- Its broader strategy is to shift capital allocations away from institutional towards retail and commercial in Australia where its market share is relatively small. To grow its mortgage marketshare, it announced the acquisition of Suncorp's banking business in Jul-22; final approval for the deal is expected in early 2024.
Risk & Catalysts
AS OF 22 Dec 2023- The limited impact of COVID-19 on the Australian economy has seen ANZ able to reverse provisions with little sign of credit risk deterioration. It is well positioned for a housing market downturn with collective provisions of ~70 bp.
- ANZ has a relatively small share of the Australian domestic retail market, but it aims to increase market share through the acquisition of Suncorp Bank (final authority approval/rejection will come through in early 2024).
- ANZ’s large presence in New Zealand makes it more exposed to that economy, but there has been no negative impact so far, nor is one anticipated.
Key Metric
AS OF 26 Dec 2023| AUD mn | Y19 | Y20 | Y21 | Y22 | Y23 |
|---|---|---|---|---|---|
| Return on Equity | 10.8% | 6.2% | 9.9% | 10.1% | 10.9% |
| Total Revenues Margin | 2.0% | 1.8% | 1.7% | 1.8% | 1.9% |
| Cost/Income | 47.7% | 52.9% | 51.9% | 51.6% | 48.5% |
| CET1 Ratio (APRA) | 11.4% | 11.3% | 12.3% | 12.3% | 13.3% |
| CET1 Ratio (International) | 16.4% | 16.7% | 18.3% | 19.2% | 19.2% |
| APRA Leverage Ratio | 5.6% | 5.4% | 5.5% | 5.4% | 5.4% |
| Liquidity Coverage Ratio | 143% | 139% | 136% | 129% | 132% |
| Gross Impaired Loans/Gross Loans | 0.3% | 0.4% | 0.3% | 0.2% | 0.2% |
CreditSight View Comment
AS OF 08 Jan 2024ANZ has a relatively small share of the Australian domestic retail market, which it has overhauled and aims to improve through the acquisition of Suncorp Bank (approval for the merger is before a tribunal), but it is the largest bank in New Zealand and is the leading corporate bank in both countries; both divisions are performing well, as is a new commercial division. The bank’s recent focus has been on a new retail app, an improved payments business, and sustainable finance. The NIM hit a bottom in 1H22, improved, and is on its way down again. Asset quality is strong, with ~57 bp of collective provisions. Pro-forma for the Suncorp acquisition, its CET1 ratio is ~12.1%. We see better value in its Tier 2 and its sole $ AT1. We do not see call risk with the Australian bank majors.
Recommendation Reviewed: January 08, 2024
Recommendation Changed: October 05, 2016
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Hyundai Motor
Toronto Dominion
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Fundamental View
AS OF 12 Dec 2023- Having run off its non-core assets and sold Barclays Africa, Barclays is now focusing on improving profitability.
- It benefits from its wide diversification in UK and US markets, with investment banking performing well in recent periods despite being perceived as volatile and higher risk.
- Barclays’ large consumer finance business might prove to be vulnerable to rising interest rates and the cost of living crisis, but group earnings have been bolstered by good trading income and have, overall, benefited from the higher rates.
- Economic uncertainty clouds the near term outlook, but Barclays has strengthened its balance sheet metrics, with improved capital/leverage ratios, strong liquidity, and good loss-absorbing capacity.
Business Description
AS OF 12 Dec 2023- Barclays is a major global financial services provider, engaged in personal banking, credit cards in the US, UK and Europe (Barclaycard), corporate and investment banking, and wealth and investment management.
- Having had an extensive international presence in Europe, the Americas, Africa and Asia, it has narrowed its focus to the UK & US markets, and has sold its stake in Absa (Barclays Africa).
- Its operations were previously split into Core and Non-Core, with Barclays Non-Core (BNC) containing the Group's non-strategic assets and businesses. Following an accelerated wind-down, Barclays closed BNC on 1 July 2017 with residual RWAs of £23 bn re-absorbed by the bank's business divisions.
- Barclays has implemented its ring-fencing split under which the newly established Barclays Bank UK PLC has become its UK ring-fenced bank (from 1 April 2018) and Barclays Bank PLC continues as the non-ring-fenced bank (accounting for around 80% of group assets).
Risk & Catalysts
AS OF 12 Dec 2023- With the UK and US economies beset by high inflation and high interest rates, asset quality is likely to come under pressure, and credit losses look set to rise, although so far there are no material signs of stress.
- Barclays has substantial credit card businesses in the UK and US, which could be vulnerable to the economic weakness.
- There is an ongoing debate about the weight of investment banking in the group as peers scale back or exit certain activities.
- A rescission offer to bondholders after the over-issuance of structured securities in the US resulted in large losses in 2021 and 1H22, partially offset by hedges, but that appears to have been an isolated case.
Key Metric
AS OF 12 Dec 2023| £ mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 7.4% | 8.7% | 10.5% | 3.8% | 5.3% |
| Total Revenues Margin | 1.6% | 1.7% | 1.6% | 1.7% | 1.9% |
| Cost/Income | 63.1% | 67.0% | 66.8% | 63.8% | 71.3% |
| CET1 Ratio (Transitional) | 14.0% | 13.9% | 15.1% | 15.1% | 13.8% |
| CET1 Ratio (Fully-Loaded) | 14.0% | 13.7% | 14.7% | 14.3% | 13.5% |
| Leverage Ratio (Fully-Loaded) | 5.0% | 5.3% | 5.2% | 5.3% | 4.5% |
| Liquidity Coverage Ratio | 159% | 165% | 168% | 162% | 160% |
| Impaired Loans (Gross)/Total Loans | 2.1% | 2.0% | 2.2% | 2.6% | 2.3% |
CreditSight View Comment
AS OF 22 Jan 2024We have a Market perform recommendation on the senior debt of Barclays PLC (holding company) and an Outperform on Barclays Bank (operating bank). We also see its Tier 2 as Cheap. Barclays has benefited from the diversification of its balance sheet and earnings, both geographically, with a large part of its business in the US, and by business, encompassing personal and business banking in the UK, consumer finance in the UK and US, and investment banking. While some of these businesses carry higher credit risk (e.g. credit cards) or market risk, recent performance has been solid, and asset quality remains benign. Capital ratios have improved, and it looks well protected against economic headwinds. Liquidity and funding metrics are strong.
Recommendation Reviewed: January 22, 2024
Recommendation Changed: January 13, 2020
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion
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Search topics about wealth insights and investments.Société Générale
- Sector: Financial Services
- Sub Sector: BanksInsuranceSpecialty Finance
- Region: EuropeFrance
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Fundamental View
AS OF 04 Dec 2023- SocGen’s business is not geared to benefit significantly from the higher rate environment, given the quirks of the French market. Its investment banking business is doing well and looks less risky these days.
- The sale of its Russian businesses entailed a large write-down in 1H22, but it had a minimal capital impact and has benefited SocGen’s credit profile.
- Capital ratios have improved sizeably in recent years, making its MDA cushion comfortable.
- Asset quality also looks good, with a relatively low cost of risk and decreasing non-performing loans.
Business Description
AS OF 04 Dec 2023- SocGen is one of the leading retail and commercial banks in France and is also active in corporate and investment banking internationally. It has strong franchises in equipment financing, car leasing and fleet management.
- Its operations are split into French Retail Banking, Private Banking & Insurance, International Retail Banking, Mobility & Leasing Services, Global Banking & Investor Solutions, and a Corporate Centre.
- Retail banking in France includes the Société Générale, Crédit du Nord and Boursorama brands. In December 2020, it announced the merger of the Société Générale & Crédit du Nord networks, largely in order to reduce the number of branches.
- International Retail Banking includes operations in Western Europe, Czech Republic, Romania, Africa/Asia & Other Mediterranean regions.
- The acquisition of LeasePlan, and Boursorama’s agreement to take over ING’s French retail business, highlight SocGen’s determination to extend its franchise.
Risk & Catalysts
AS OF 04 Dec 2023- Exposure to Russia has been managed down significantly. While not completely gone, it now makes up only a small percentage of the bank’s balance sheet.
- It has substantial investment banking and capital markets operations that are somewhat less diversified than those of peers, but the business’s risk profile has improved.
- Trends in retail banking remain subdued, not helped by low rates and a changing operating environment, although management has already implemented changes in its French business.
- Our central scenario is that earnings will be lumpy for a little while. We expect SocGen to reshape the perimeter of its business operations several times over the next 12-24 months.
Key Metric
AS OF 04 Dec 2023| € mn | 3Q23 | Y22 | Y21 | Y20 | Y19 |
|---|---|---|---|---|---|
| Return On Equity | 1.7% | 2.8% | 8.9% | (0.4%) | 5.2% |
| Total Revenues Margin | 1.6% | 1.8% | 1.8% | 1.6% | 1.9% |
| Cost/Income | 70.4% | 66.3% | 68.2% | 75.6% | 71.9% |
| CET1 Ratio (Transitional) | 13.3% | 13.5% | 13.7% | 13.4% | 12.7% |
| CET1 Ratio (Fully-Loaded) | 13.2% | 13.5% | 13.6% | 13.2% | 12.7% |
| Leverage Ratio (Fully-Loaded) | 4.2% | 4.3% | 4.8% | 4.7% | 4.3% |
| Liquidity Coverage Ratio | 147% | 145% | 129% | 153% | 124% |
| Impaired Loans (Gross)/Total Loans | 3.3% | 3.1% | 8.6% | 3.7% | 3.5% |
CreditSight View Comment
AS OF 10 Jan 2024SocGen’s main business divisions have seen good growth post-COVID 19 and improving profitability, helped by rising interest rates. Global Markets earnings have been volatile over the years, but trading income has been strong in recent periods. Asset quality ratios are good, all things considering. Its financial services business – mainly auto leasing, helped by the acquisition of LeasePlan, has been making an increased contribution. The outlook for French Retail is quite weak until 2024. Capital and leverage ratios look much better than they did in the past. We moved its Tier 2 to Cheap from Fair, and its AT1 from Cheap to Fair, on 10 January 2024.
Recommendation Reviewed: January 10, 2024
Recommendation Changed: May 12, 2023
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BMO Financial
Hyundai Motor
Toronto Dominion
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Fundamental View
AS OF 27 Nov 2023- Citigroup is a solid global money center bank that has done a decent job cleaning up legacy issues and fortifying the risk profile in the wake of the GFC, though it still lags peers on several fronts including profitability.
- Citi has more geographic diversification than peers owing to its international presences, though the retail side is shrinking considerably as Citi exits most of Asia and Mexico, refocusing around a global wealth management/private bank strategy.
- Citi lags on the domestic deposit front, with less than half of the deposit base of money center peers and a much smaller physical footprint, though it has been focused on driving deposit flows the past couple of years.
Business Description
AS OF 27 Nov 2023- Citigroup ranks as the 3rd largest U.S. bank by total assets ($2.37 tn) at 3Q23 and 3rd largest by Total Equity ($210 bn).
- Citi is 4th in terms of U.S. deposits with approximately $757 bn as of 3Q23 across 665 branches (S&P Capital IQ). Given the significantly smaller branch footprint, Citi does not generally possess leading market shares in most states besides South Dakota (#1).
- Citi's major business lines include U.S. consumer (mortgages and credit cards) and retail banking, global consumer, global corporate & investment banking, and global payments. The company is in the process of exiting 13 international consumer markets, refocusing the non-US footprint around four regional hubs and combining wealth management and the private bank to drive synergies out of the hubs.
Risk & Catalysts
AS OF 27 Nov 2023- Citi is still lagging peers on profitability (both ROA and ROTCE); new CEO Fraser seems to have adopted the profitability gap as a key focus point as well, and we see Fraser’s strategic moves (e.g. int’l consumer exits) as aimed at capital optimization to improve ROE.
- While not as severe as a Wells-type situation, Citi’s regulatory mishaps introduces risks should the bank fail to show improvement in internal controls, or if another major risk management failure crops up. Our base case: Citi will be able to satisfy regulators and end up with improved infrastructure, though it will likely be a multi-year process with resultant upward cost pressures.
- Citi’s global footprint makes it more exposed to emerging markets and non-domestic economies, though pending exits of ‘riskier’ consumer loan books in Asia and Mexico should help the EM risk profile; Citi has also demonstrated an ability to unwind other riskier exposures (e.g. Russia).
Key Metric
AS OF 27 Nov 2023| $ mn | FY19 | FY20 | FY21 | FY22 | LTM 3Q23 |
|---|---|---|---|---|---|
| ROAE (annual) | 9.9% | 5.7% | 10.9% | 7.5% | 6.6% |
| ROAA (annual) | 0.97% | 0.48% | 0.92% | 0.61% | 0.56% |
| PPNR / Avg. Assets | 1.61% | 1.28% | 1.02% | 0.97% | 4.05% |
| Efficiency Ratio | 58% | 61% | 68% | 67% | 267% |
| Net Interest Margin (Annual) | 2.59% | 2.14% | 1.94% | 2.20% | 2.36% |
| Net charge-offs (LTM) / Loans | 1.12% | 1.08% | 0.70% | 0.55% | 0.83% |
| Common Dividend Payout | 23% | 39% | 19% | 27% | 113% |
| CET1 Ratio | 11.8% | 11.5% | 12.3% | 13.0% | 13.6% |
| Supplementary Leverage Ratio (SLR) | 6.2% | 7.0% | 5.7% | 5.8% | 6.0% |
| Liquidity Coverage Ratio (LCR) | 115% | 118% | 115% | 118% | 117% |
CreditSight View Comment
AS OF 16 Jan 2024We are comfortable with Citi and like it for the spread value over mid-A banks and compelling carry against IG corporates. We see technical support over the next 2-3 years as Citi exits int’l consumer and reduces RWAs, in turn lowering regulatory debt needs; Banamex retail is the big remaining piece, but a 2025 event at the earliest. Citi’s lagging profitability to peers is a real differentiator, but we are constructive on CEO Fraser’s overhaul and expect (and need) to see more momentum in 2024. Citi showed no ill effects from the SVB collapse, and the largely non-US commercial deposit base is inextricably tied into the bank’s broader product/service offerings with extensive and long-dated customer relationships exemplified by stable (if more costly) deposit bases and solid NIM expansion.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: January 12, 2017
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion
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Fundamental View
AS OF 27 Nov 2023- Bank of America is a strong and steady credit, having dramatically improved its risk profile over the last decade and significantly closed the gap with industry bellwether(s); effective expense management has also been a demonstrated core competency.
- The company remains well diversified across business lines in lending, markets, and asset/wealth management and has shown little appetite for excessive risk-taking, exemplified in part by strong stress test performance versus peers.
Business Description
AS OF 27 Nov 2023- Bank of America ranks as the 2nd largest U.S. bank by total assets ($3.15 tn) and by total deposits ($1.88 tn) as of 3Q23.
- Bank of America ranked 2nd in terms of U.S. deposits at YE22 with approximately $1.88 tn in deposits and 3,796 branches (S&P Capital IQ) with a coast-to-coast branch presence including leading market shares in California (#1), North Carolina (#1), Texas (#2), Florida (#1), and New York (#3).
- Bank of America's major business lines include U.S. retail banking, credit cards, global corporate & investment banking, and global wealth & investment management.
Risk & Catalysts
AS OF 27 Nov 2023- Bank of America has made excellent progress generating operating efficiencies and improving profitability as the crisis-era overhangs fade further into the background; it still lags peer JPM on some measures, including capital markets, but is well positioned to capture any rebounding loan growth.
- The company is relatively more sensitive to interest rates than peers, estimating that a +100 bp parallel shift in the interest rate yield curve would increase net interest income by $3.1 bn over the next 12 months (as of 3Q23).
- Also a sector-wide concern, Bank of America is exposed to cyber threats, although it has been deploying significant resources into tech spend the past few years.
Key Metric
AS OF 27 Nov 2023| $ mn | FY19 | FY20 | FY21 | FY22 | 3Q23 |
|---|---|---|---|---|---|
| ROAE (annual) | 10.2% | 6.7% | 11.7% | 10.2% | 10.9% |
| ROAA (annual) | 1.1% | 0.6% | 1.0% | 0.9% | 1.0% |
| PPNR / Avg. Assets | 1.48% | 1.06% | 0.94% | 1.02% | 1.20% |
| Efficiency Ratio | 60% | 66% | 67% | 65% | 63% |
| Net Interest Margin (Annual) | 2.43% | 1.90% | 1.66% | 1.83% | 2.14% |
| Net charge-offs (LTM) / Loans | 0.37% | 0.40% | 0.23% | 0.18% | 0.30% |
| Common Dividend Payout | 22% | 35% | 21% | 25% | 24% |
| CET1 Ratio | 11.2% | 11.9% | 10.6% | 11.2% | 11.9% |
| Supplementary Leverage Ratio (SLR) | 6.4% | 7.2% | 5.5% | 5.9% | 6.2% |
| Liquidity Coverage Ratio (LCR) | 118% | 116% | 122% | 115% | 116% |
CreditSight View Comment
AS OF 16 Jan 2024Our Outperform recommendation on BAC is based on a combination of fundamental strength (consistent peer-leading stress test loss rates), spread pickup over high-quality peer banks, and attractive valuations against broader corporates. Technical support is not as strong as we see all the banks returning to more normalized issuance in 2024; positively, we think BAC is less exposed than money center peers to net new issue needs from Basel III endgame implementation. The company’s missteps on the HTM portfolio is an earnings and margin opportunity cost issue, not a fundamental one, and justified ex post by the large and stable retail deposit base demonstrated through the post-SVB failure fallout; and profitability is still healthy with solidly mid-teens ROTCE, despite the securities drag.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: November 04, 2013
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion
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Fundamental View
AS OF 26 Oct 2023Bank Rakyat Indonesia (BRI) is rated Baa2 (sta)/ BBB- (sta)/ BBB (sta). As the second largest bank in Indonesia that is majority-owned (53.19%) by the Indonesian government, and key role in servicing the ultra-micro and micro segments, we expect a very high likelihood of government support in times of need.
BRI’s credit strength has been its very high margins (>7%; rose after consolidating Pegadaian and PNM) and consequently, ROE, as well as capital buffers (>20% CET 1 ratio), which are ahead of its country peers and among the highest in APAC.
The bank has a leading franchise in the country’s micro and small commercial segments with a long operating track record. Well managed credit costs have in turn helped to support its high margins.
Business Description
AS OF 26 Oct 2023- The history of Bank Rakyat Indonesia can be traced back to 1895; it is now the second largest bank in Indonesia by assets.
- BRI was listed on the Jakarta Stock Exchange in 1992, now the Indonesia Stock Exchange in 2003. The Indonesian government held a 53.2% stake in the bank as of end-September 2023. Foreign investors hold 36.6% of the bank's shares and domestic investors 10.1%.
- Its core business focus is on the ultra-micro, micro and small commercial segments, which now account for just over two-thirds of its total loan book.
Risk & Catalysts
AS OF 26 Oct 2023BRI’s high exposure to ultra-micro and micro (~47% of loans) and small commercial loans (18%) leads to higher credit costs compared to its peers. Asset quality within the COVID restructured book (mainly small and micro loans) has not trended as well as the bank’s earlier guidance, but the higher margins generated continue to provide more than sufficient room for credit costs to be absorbed. We are comfortable with the credit given its very high capital buffers.
BRI’s interest margins have been resilient thanks to its increased focus on the higher yielding micro segment so its returns have continued to be strong. It is on track to exceed its FY23 NIM guidance.
The Indonesian economy continues to be on good recovery momentum and is set to receive a boost from election related spending in 2H23, which should help to keep general asset quality and credit costs in check, as well as aid loan growth, which has been impacted by tight liquidity conditions in the first half.
Key Metric
AS OF 26 Oct 2023| IDR bn | FY19 | FY20 | FY21 | FY22 | 9M23 |
|---|---|---|---|---|---|
| PPP ROA | 4.8% | 4.2% | 4.7% | 5.2% | 5.7% |
| ROA | 2.5% | 1.2% | 1.9% | 2.9% | 3.2% |
| ROE | 17.7% | 8.6% | 12.0% | 17.4% | 19.4% |
| Equity/Assets | 14.6% | 14.1% | 17.2% | 16.0% | 16.6% |
| CET1 Ratio | 21.7% | 20.1% | 26.2% | 24.5% | 26.3% |
| NPL Ratio | 2.80% | 2.88% | 3.00% | 2.67% | 3.07% |
| Provisions/Loans | 2.47% | 3.43% | 3.47% | 2.51% | 2.59% |
| LDR | 88% | 91% | 92% | 87% | 97% |
CreditSight View Comment
AS OF 26 Oct 2023BRI has become the 2nd largest bank in Indonesia by assets, having been overtaken by Bank Mandiri after the latter’s sharia business consolidation. About 47% of its consolidated loan book consists of micro loans and another 18% of small commercial loans, leading to its higher credit costs than peers. Asset quality within the COVID restructured book has not trended as well as management had earlier hoped for, but the higher margins that BRI generates continue to provide more than sufficient room for credit costs to be comfortably absorbed. BRI and its country banking peers also have the highest capital ratios in the region (26.3% CET1 ratio for BRI) and are therefore in the position to absorb losses. We like BRI because of its very strong profitability and capital. We maintain our M/P reco.
Recommendation Reviewed: October 26, 2023
Recommendation Changed: July 08, 2022
Who We Recommend
BMO Financial
Hyundai Motor
Toronto Dominion